Avoid These Personal Loan Traps

Getting a personal loan is a great idea. Not only are you making some of your dreams possible (i.e. getting a car, or a house, or the trip that you want), you are also ready to become financially responsible and take on new heights.

Unfortunately, there are some people who are willing to hurt other people just to get what they want. Here are some personal loan Philippines and other parts of the world.

Interest that is calculated beforehand

Pre-compute interest without your knowledge is a bad deal.  Avoid it. And don’t be afraid to do something when you became a victim.

Pre-compute interest is a complex way of calculating interest. The entire reason it exists is to make sure that you pay more interest in the early months/years of your loan, making you do go deeper to your debt. So, if you pay off your loan early, you will end up paying a higher interest rate than the rate quoted.

If you take out a loan with a three year term, and you take the full three years to pay back the loan, then there is no difference between a normal loan and a pre-compute loan.  But, if you pay off the loan early, then you will pay more interest.  Advertising is particularly misleading if there is a promise of “no prepayment penalty” because interest is charged according to the “pre-compute” method.

Penalty for prepayment

Prepayment is a tricky game. Though it’s good that you want to pay your debt early on there are still repercussions to consider. There are indirect ways of charging a prepayment penalties (pre-compute interest and origination fees).  And then there are direct ways: a prepayment penalty.  Most lenders do not charge this, so you should be able to avoid it completely. Just make sure you ask if there is a prepayment penalty.

Insurance

Some personal loans offer insurance and this may lead to danger. Many personal loan providers will try to add an insurance sales pitch at the end of a loan closing.  The two most typical types of insurance are life insurance and unemployment insurance.

Life insurance – a typical sales pitch would sound like this: “for just the cost of a can of soda a day, you can make sure you children never have to worry about this debt if you die.” Beware these high-pressure sales tactics.  The value of these add-on policies is almost always outrageously bad.

Unemployment insurance – This type of insurance could be a bit more compelling (because, unlike term life insurance, it is difficult to buy a policy separately that would make loan payments on your behalf if you lose your job).  I have seen people benefit from these policies.  But you need to do the math.  How much does it cost per month?  So long as you don’t have a high risk of losing your job in the next 6-12 months, you are almost always better off saving the money (rather than paying the premium).

Beware of these traps! Don’t say we didn’t warn you!

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